Microsoft's (MSFT) Activision Blizzard (ATVI) Acquisition: What Happens Next?

Microsoft Corporation's (MSFT) $68.7 billion acquisition of Activision Blizzard Inc. (ATVI) is the biggest deal in its history and a bold bet on the importance of gaming in its future revenue mix. With its slate of blockbuster franchises, Activision Blizzard will provide a healthy boost to Microsoft's overall income in the future. The video game company boasted sales of $8.7 billion in 2021, while Microsoft reported $15.4 billion in revenues from its gaming division during the same time period.

But the road ahead is not easy. The tech giant is inheriting a plethora of problems in Activision. It is already tackling some—like those related to sexual harassment in the workplace—and will have to make up the playbook for others as they occur. Here are three things that investors can expect after the merger is complete.

Activision CEO Bobby Kotick Will Leave  

Multiple reports, quoting anonymous sources, state that Kotick, who ran Activision for more than two decades, will leave after the acquisition is complete. Chris Spencer, current head of Microsoft's gaming division, will become CEO of the new venture. The departure of a long-time CEO can make investors jittery. But that may not be the case this time around.

While he is credited with transforming Activision from a bankrupt company to one of the world's biggest video game publishers, CEO Kotick came under fire last year after reporting by The Wall Street Journal revealed that he was aware of the sexual misconduct allegations in the company but did not report them to his board.  

Kotick was one of the highest-paid chief executives of a publicly traded company in 2020 with a pay packet of $155 million. As Activision's shares tumbled in wake of the workplace culture controversy last year, Kotick asked the company's board to cut his salary to $62,500, the minimum amount possible per California law.

Microsoft's 45% premium on Activision's shares has more than made up for his sacrifice, however. Kotick owns 4 million shares, or 0.53% of the company, and Bloomberg estimates that he should earn a windfall of $375.3 million after the acquisition is complete. 

Microsoft Facing Antitrust Scrutiny

Activision's shares jumped by almost 38% upon news of the deal, but Microsoft investors remained relatively unexcited about it. In fact, at the end of trading on Jan. 18, they sent the company's shares down by almost 3%. One reason for their lukewarm reception of the deal is the prospect of greater antitrust scrutiny. Microsoft has largely escaped censure even as its counterparts in the technology industry faced the wrath of representatives during repeated appearances before Congress in recent years.

But the current deal—a veritable merging of giants that could upend the dynamics of their respective industries—could change that. Already, within hours of the Microsoft announcement, the Federal Trade Commission (FTC) said that it was launching a "review of merger guidelines." Former Justice Department antitrust chief Makan Delrahim told The Wall Street Journal that recent actions by antitrust agencies in the United States and abroad against technology conglomerates "suggest the agencies will take a close look at the transaction."

Expect fireworks when that happens, say analysts. Gene Munster from Loup Ventures said that the deal sets up "drama" and a "collision course" between Silicon Valley and D.C.

The Market for Microsoft's Game Pass Will Grow

Most of Microsoft's stock price gains in recent years have occurred due to investor enthusiasm for its cloud services division—Azure. The Activision acquisition could further boost its importance to the company's future.

Microsoft says that the acquisition will help it "democratize" gaming by providing access to best-selling titles, which are otherwise expensive, through a cloud-based monthly subscription service called Game Pass. According to Microsoft, Game Pass had 25 million subscribers, an increase of 39% in the last year.

Research firm Omdia expects the cloud gaming market to hit $12 billion by 2026 from last year's $3.7 billion. With a market share of 60%, Microsoft is a clear leader in the market. Piers Harding-Rolls of Ampere Analysis says that the acquisition makes it easier for Microsoft to achieve its ambition of making gaming "cheaper" and "more accessible." In the process, it could open new markets for the company in developing countries, where smartphone and mobile gaming sells more than console-based gaming.